Time-varying parameter

Hello all:

This is my first post, though I have been using Dynare for years.

I am trying to study time-varying policy parameters using Ascari’s positive trend inflation model. I want to study this using both first and second order approximation.

If I solve this model by hand and simulate the code, even in the first order I find that this parameter to affect inflation and output and interest rates. Thus, my first order approximation by hand suggests this to be important.

I am now trying to replicate this result using Dynare. I have the excellent code available on the dynare user’s webpage. All I am doing is adding the time varying parameter but surprisingly this does not seem to be corroborating my results. I have little experience with non-linear models, but all I am doing is adding the time-varying parameter, thus the possibility of a coding error is minimal. Can anyone have a look at my code and advise? Cheers.

tor.mod (7.4 KB)

Why should we expect anything to happen at first order? If there are no other shocks, inflation is at its steady state and a higher weight on deviations from the steady state does not matter. That logic suggests that at least a second order approximation is required.

Thanks. You make sense.

What I am concerned about is why my code doesn’t seem to show any affects in second order as well. I am not sure with this second order approximation.